How Does BuzzFeed Make Money?

I'd never given much thought to how BuzzFeed, Internet purveyor of baby name quizzes and cat memes, kept its lights on until the announcement of its latest venture capital deal. Andreessen Horowitz, a Silicon Valley investment firm, announced a new $50 million stake in the company. That got my attention. How could BuzzFeed attract so much cash? What is it selling?

BuzzFeed serves up content that is meant to be shared across other Internet social platforms including Twitter , Facebook , Pinterest, and Google +. This sharing culture drives both inbound and outbound linking to the site, capitalizing on the power of viral content. The mission of the site's 150 or so editors is to create a mix of fun and hard content. To this end, the site pumps out about 400 new stories per day, now topping 100 million unique visitors per month. Of these visitors, about three-quarters come into the site through other social media sources, indicating that they've clicked through something that has already been shared.

BuzzFeed founder and CEO Jonah Peretti has described the company's goal as becoming "the defining media company for the social age," a phrase notably front and center in the press releases of its investors. BuzzFeed's redefining of how the business of media gets done would seem to be more about leading publishers into more effective ways of monetizing their businesses than it is about content.

Publishers have long been suffering from declining ad revenues, with display advertising down sharply from its heyday. Digital advertising has been suffering as well, with banner ads generating a mere 0.2% click-through rate, and fierce bidding across the ad exchanges continuing to drive revenue down.

Native advertising drives BuzzFeed

The key to BuzzFeed's innovation has been its willingness to eschew the typical mainstays of digital advertising in favor of a revenue model that is entirely dependent on native advertising. Also referred to as sponsored content, these ads are as much about selling the brand as they are about counting click-throughs. Proponents of native advertising describe it in almost altruistic terms, as a way of giving something -- in this case compelling content -- to consumers who take the time to view the ad.

" 13 First Date Questions That Are Actually Insightful ," for instance, is promoted by Bravo TV. With nary a mention of Bravo within the list of 13, the content has been carefully designed to appeal to Bravo's audience. The goal, true to social media's overall soft sell approach, is to simultaneously engage and build brand affinity. While the advertiser is named alongside the yellow "Promoted by" box, the goal is clearly to deliver to readers an experience that doesn't feel like advertising.

"Brands do word-of-mouth marketing at scale," according to BuzzFeed's Chief Revenue Officer, Andy Wiedlin. Branded content is not only seen on the site, but also gains "lift" as it's shared across various social media platforms, sometimes doubling or even tripling the number of click-throughs by BuzzFeed users.

Native ads provide a higher brand lift than traditional banner ads and an 18% increase in purchase intent, according to a recent study by About 32% of respondents in the same study said they would share the content with friends and family.

In the US, about $1.4 billion was spent on native advertising in 2012, a number that is expected to more than triple by 2017 to $5 billion, according to projections by marketing company BIA Kelsey. While display advertising is not expected to decline in that same period, its growth is projected to slow dramatically, moving from $2.9 billion in 2012 to $6.8 billion in 2017, a point at which the market share for native advertising will be increasing to nearly half.

Native advertising for the digital age

Native advertising is nothing new. TV shows sponsored by advertisers, editorial ads that mimic the style of the publication, even informercials, all attempt to fit into a newsy format with the goal of selling without appearing "salesy." However, the real change is the ease with which digital media can produce and distribute sponsored content, allowing for a dramatic spread of this approach.

Traditional media companies are moving to sponsored content more slowly than BuzzFeed, but the the change is still notable. In its most recent quarterly report, The New York Times noted a continued decline in advertising revenue, but identified native advertising as a bright spot. "We are particularly encouraged by the growing success of Paid Posts, our native advertising solution, which we launched in January," said Mark Thompson, Times CEO and president.

Serious journalism has long attempted to uphold the division between impartial reporting and sponsored stories, tending to the so-called "wall between church and state." The Times , whose prominent identification of sponsored content has dwindled from a wide, dark blue border to a more lightly shaded version, has drawn some criticism for seemingly blurring the lines. For the Times and similar other "hard" journalism outlets, a key to success will be finding the balance between blending native advertising so that it appeals to readers and keeping the labeling prominent enough to please readers, watchdogs, and regulators.

It may well be that the perceived standards for journalistic boundaries are lower on a site such as BuzzFeed, which still takes pride in its mandate to never "trick" consumers. Nevertheless, the public's threshold for consumption of native advertising has yet to be tested.

The future of sponsored content

The regular infusion of large sums of venture capital demonstrates that some savvy tech investors are betting on a bright future for BuzzFeed and its advertising revenue model. Nevertheless, the company's sharing strategy is very much dependent on other social media platforms, an interdependence notorious for acquisitions, rule changes, and strikes against competition. Changes in the social media world could conceivably undermine BuzzFeed's success.

Can native advertising truly define "the social age"? For now, advertising trends and investment capital seem to indicate the answer is yes. This strategy will continue to be tested not only by the patience of consumers but by the willingness of regulators to let the space between news and ads become increasingly fuzzy.

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